December 7, 2018

Stock Compensation and The New ASU: A Technical Explanation of the Impact on Public and Nonpublic Companies

A new Accounting Standard Update (ASU) will change the way entities measure employee share-based payment awards and address accounting for nonemployee share-based payment transactions.  The Financial Accounting Standards Board (FASB) has released ASU 2018-07—Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, as part of its simplification initiative.

This update creates a more uniform and simplified process for entities accounting for such transactions: “The areas for simplification…involve several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees.”

What are the major changes for public companies?

Entities will now measure employee share-based payment awards at the “grant date fair value of the equity instruments,” instead of at the “fair value of consideration received” or at the “fair value of the equity instrument.”

Measurement Date: Equity-classified nonemployee share-based payment awards are now measured at the grant date.  The current Generally Accepted Accounting Principles (GAAP) leave open the possibility of a subjective measurement date because of the option to choose such date as the earlier of two possible dates: 1) when a commitment of performance was reached, or 2) when the performance was complete.

Classification Reassessment of Certain Equity-Classified Awards: The new amendment condenses the reassessment of certain equity-classified awards.  Use ASU 2018-07 requirements, unless the award is modified after the good has already been delivered.  This eliminates the need to reassess classification of these awards upon vesting.  This amendment aligns perfectly with FASB’s initiative to simplify certain accounting standards, as the current GAAP rules are complex when reassessing certain equity-classified awards.

What are the major changes for nonpublic companies?

Provisions within ASU 2018-07 address changes to the way in which nonpublic companies will now address calculated value and intrinsic value.

Calculated Value: Nonpublic entities will use the historic volatility of the appropriate industry-sector index to estimate the expected volatility of share price when unreliable instruments are issued.

Intrinsic Value: Under current GAAP requirements, entities must measure liability-classified nonemployee share-based payment awards at fair value.  Under this new ASU, a nonpublic entity can make a one-time election to switch from fair value to intrinsic value when making such measurement.

When is the effective date?

For public businesses, ASU 2018-07 is effective for fiscal years beginning after December 15, 2018.  For all other entities, the update is effective for fiscal years beginning after December 15, 2019.  Early adoption is permitted.

The amended language of ASU 2018-07 specifies “an entity should only remeasure liability-classified awards that have not been settled by the date of adoption and equity-classified awards for which a measurement date has not been established through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption.”

For more information on this ASU, or for guidance in implementing these changes, contact a PYA executive below at (800) 270-9629.

 

© 2018 PYA
No portion of this article may be used or duplicated by any person or entity for any purpose without the express written permission of PYA.

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